Why Sunk cost should not be considered when deciding whether continue with the project or not, if Sunk cost is higher, it's a loss, therefore it should not be considered - am I right? can you give me an example? Saving Changes...
From an accounting perspective, sunk cost has no relevance on future investment decisions. Choosing to continue to fund a project is an investment decision so what we have spent has no bearing on that.
A simple example: Let's say I ordered some a custom kitchen countertop for my house. The contractor estimated $2000 for manufacturing and $500 for installation. I pay for the manufacturing costs up front but the installation costs will be paid when the countertop is installed. Let's say I sell my house before the countertop is scheduled to be installed. Unless I believe I can get sufficient value by installing it to justify the installation costs, I might choose to cancel the order and avoid the additional costs of installation.
Here is a slightly different example to explain how sunk costs should not affect future investment decisions:
You are working a project that cost $2M with an expected return of 10% ($200k). You have already spent $1M. It is an internal project so choosing whether or not to continue it is entirely an internal decision.
A new project opportunity comes up that will cost $1M with a return of 40% ($400k), but will require cancelling the in-work project. Does it make sense to finish the first project when you could profit 2x as much on a different one?
The sunk costs are already spent. If accepting the loss with no return on the project means a higher return on a different project, then it makes sense accept the loss and use your money on a more profitable endeavor. Saving Changes...
The sunk cost fallacy is when you choose to continue an activity because you have already invested in it. Who cares if the project is failing; you've already spent the money so don't waste it...
But that's not the same as considering sunk costs for the benefits/return of a project. Sunk costs should be considered when looking at ROI and benefits realization; if you don't include what you've spent you won't get a true picture of the ROI or potential benefits. You can't make an informed decision on whether it is worth it to continue. Just don't use the fact that you've already spent money as justification to continue spending money on a bad investment, or to not spend the money on a better investment. Saving Changes...
As Aaron said, "You've already spent the money". That is exactly the point
When planning what to do next, that money is spent whatever course of action you choose. The only thing you can change is what you do from now, going forward. When looking at solution approaches the "Do Nothing" option is always a valid and important consideration. It is sometimes the most rational solution.
Gated reviews are done for this very reason. Passing the gate requires showing that there is a business justification. If you've spent a bunch of money on a project that you later determined lacks a valid business case based on what you know now vs. then...stop bleeding money just out of pride that you didn't give up on a money losing project.
If the business case is no longer valid despite having already put in a lot of work, cut your losses and spend the money where it will help the business. It's very much the old saying: Don't throw good money after bad. Saving Changes...
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